Today’s interest rates may tempt public financiers to try to play the spread between tax-exempt and taxable bond yields. That invites heightened federal scrutiny, but there are some strategies likely to avoid the bite of the IRS. … For long-term debt issued for public facilities construction, for example, there is in some cases an allowable “temporary period” of a few years during which the proceeds can be invested at a profit. In the case of short-term borrowing for operating budgets, so-called revenue anticipation notes are allowable as long as they mature within a defined time period. … For 2024 and going into 2025, it’s pretty likely that the U.S. Treasury yield curve will remain inverted, with short-term taxable rates exceeding most yields on longer-term municipal paper, so the arbitrage issue will be pervasive. The arbitrage window will close only when the Federal Reserve allows the Treasury yield curve to normalize with short rates drifting to levels materially lower than the rates on muni debt. That seems unlikely until T-bills start trading two full percentage points lower than they are in today’s market — probably not sooner than late 2025, barring a recession.
Source: Governing
